In October 2018, Canada became one of the first countries in the world to legalize recreational cannabis. Whether you agree with it or not, cannabis is now publicly available for Canadians for both medicinal and recreational use.
Many Canadians are tempted to invest in “the next big thing” – in this case, cannabis companies. Perhaps you’ve thought about this too?
Hold on – it’s time for sober thought. Before you jump on board, make sure that you thoroughly do your homework. It’s important to research any investment, although it’s even more important critical when considering investing in emerging industries. These companies haven’t had the test of time to prove themselves and not all companies are equal.
One big concern is the level of transparency and disclosure of this emerging industry. In October, the Canadian Securities Administrators published a review of 70 reporting cannabis issuers’ continuous disclosure, and highlighted common deficiencies and best practices. The review showed that quality of cannabis companies’ disclosure needed to be improved, and they encouraged issuers to use the review as a guide for improvements.
Specifically, issuers in this emerging market often did not provide sufficient information for an investor to understand the company’s financial performance, or risks to their operations (particularly when operations were in the U.S.) including production estimates, assumptions and expectations.
When you’re evaluating a potential marijuana company investment, make sure you consider the following:
- No guarantee of success: Despite the rapidly growing number of companies in the sector, there remains no guarantee that their businesses will be profitable now or in the future. Many cannabis companies are speculating about their success on future distribution and companies’ forecasts of success may only be hopeful speculation.
- Government and legal considerations: Even with the legal regulations now complete, there may still be changes to the laws regarding where cannabis can be sold and if it can be advertised – any future changes may ultimately decrease the value of an investment.
- Pricing and taxation: Government-mandated pricing and taxation on cannabis products may also pose a risk to the success of the legal cannabis industry. Cannabis products, especially those intended for recreational use, are generally priced above the black market. In this fast-evolving situation, it’s unclear that legitimate companies growing and selling the products will be able to sell enough product to make a profit.
- Investing in American companies: While the sale and distribution of cannabis is legal in some states, it is still illegal under U.S. federal law. Should the federal authorities choose to enforce the law, it could put investors’ money at risk.
The cannabis industry has generated a great deal of interest among investors with the expectation of quick growth. However, it’s important to remember that these investments can be highly speculative and often have lofty valuations based upon expectations of future success, rather than current performance. As a result, investors risk paying an inflated price for an investment that may lose its value.
And, in certain cases, there’s no business behind the investment at all; scam artists are known to try to disguise their schemes and fraud behind a glittery veil of the “next big thing.”
So before you get swept up in the excitement and ‘high’ of the cannabis industry, research the investment opportunity, determine that it is legitimate, evaluate the risks, and consider how the investment will meet your financial goals. As we always say – Check first!
Checkfirst.ca/emerging trends/the cannabis industry
Red Flags of Investment Fraud
Recognizing and Avoiding Scams
CSA Staff Notice 51-357: Staff Review of Reporting Issuers in the Cannabis Industry
Investing in the Cannabis Industry (OSC)